Direct tax litigation cycle in India
Normal dispute
litigation route
timelines and hierarchy
A taxpayer, after receiving an
assessment order, can take an
appeal through four appellate
forums – CIT (Appeals), ITAT, High Courts, and the Supreme
Court. The current tax litigation
process in India could take 12-14
years (if appeals go up to the
Supreme Court) to resolve a tax
dispute. The lag is mainly because
no timelines are mandated for
conclusion of proceedings at
the appellate forums, significant
workload, lack of a fast-track
dispute resolution mechanism,
etc.
Crystallization of tax demand
The tax demand crystallizes once
the assessing officer passes an
assessment order. In case of
an adverse
assessment order,
the taxpayer can file an appeal
before the Commissioner of
Income tax (Appeals) [CIT(A)] (an
appellate authority within the
tax administration) and can seek
a stay on a part of the demand
until the appeal is decided by
the CIT(A). In most cases, a stay
is granted by the tax authorities
upon payment of a certain
portion of tax demand upfront until the disposal of appeal by
the first appellate authorities,
pursuant to which the cycle
for seeking the stay is to be
repeated.
If an order is passed by the
appellate authority [i.e., the
CIT(A)] in favor of the taxpayer,
the assessing officer has the
statutory power to challenge
the order passed by the CIT(A)
to the ITAT, High Court, and the
Supreme Court. This appeal
process is the primary reason for
long pendency of tax disputes.
Compliance and administrative costs of
tax litigation
The compliance cost for the
taxpayer and the administrative
cost for tax authorities in
pursuing this litigation is
calculated in terms of money
and the time spent. For
taxpayers, this cost includes legal
counsel and consulting fees,
administrative costs for following
up and tracking appeals, and the
managerial time spent on dealing
with tax authorities and appellate
channels in pursuing these
appeals. For tax authorities, there
are costs incurred on payments
to tax counsels, deployment of
senior tax department officers
to represent it before the tax
tribunals, and payments to senior
counsels for taking up cases in high courts or the Supreme
Court. These costs also include
the cost of time and effort spent
on briefing these counsel, and
documenting, preserving, and
tracking case records over the
years of litigation, as well as office
space occupied for maintaining
relevant records, etc. It also eats
away the time that tax authorities
can spend on other functions,
such as taxpayer services.
Reducing litigation pendency−initiatives
taken to date
To reduce this burden of tax
litigation, Indian tax authorities
have taken a number of
measures. One of these is
stipulating monetary thresholds
(of tax effect) below which
Indian tax authorities will not file
appeals and withdraw the ones
that have already been filed.
These thresholds are mentioned
below:
• Tax effect of INR 20 lakh
(earlier INR 10 lakh) for filing
an appeal before the ITAT
• Tax effect of INR 50 lakh
(earlier INR 20 lakh) for filing
an appeal before the high
court
• Tax effect of INR 1 crore
(earlier INR 50 lakh) for filing
an appeal before the Supreme
Court
As a result, 6,855 departmental
appeals have been identified and
withdrawn from ITAT and 7,049
departmental appeals have been
withdrawn from the high court.
Similarly, 959 cases have been
withdrawn from the Supreme
Court. Other measures taken by
the income tax administration to
reduce tax disputes are detailed
in Annexure 2.
‘Vivad se Vishwas’ Scheme
In the Budget Speech 2020,
the Finance Minister (FM)
said that currently 483,000
direct tax cases are pending
in various appellate forums.
The ‘Sabka Vishwas Scheme’
launched in the previous year
to reduce litigation in indirect
taxes had resulted in settling
about 189,000 cases. The FM
announced that the government
would also introduce a scheme
to resolve pending direct tax
disputes. The government has
now introduced the ‘Direct Tax
Vivad se Vishwas Bill 2020’ in
Parliament on 5 February 2020.
The main features of the ‘Vivad
Se Vishwas’ scheme as outlined
in the Bill are mentioned below:
• The scheme will remain open
until a date to be notified by
the government (The FM’s
Budget speech announcement
was that the scheme would
run until 30 June 2020.)
• Taxpayers in whose case
appeals are pending at any
appellate level can avail this
scheme.
• A taxpayer would be required
to pay the amount of the
disputed tax, and get a
complete waiver of interest
and penalty provided the
payment is made by 31 March
2020.
• A taxpayer who avails this
scheme after 31 March 2020
will be required to pay an
additional amount of 10
percent of the disputed tax
and would then get a complete
waiver of interest and penalty.
While the initiative for a legacy
direct taxes dispute resolution
scheme is welcome, one of
the significant proposals
in the current scheme is a
stumbling block. The proposed
scheme treats a taxpayer
appeal and a departmental
appeal on the same footing. A
taxpayer is supposed to pay
the entire amount of disputed
tax in case of a departmental
appeal too, even though the
taxpayer has won the case
at a lower appellate forum
and it is the department
which is in appeal. Instead, an
appropriate reduction in the
disputed tax amount to be paid
by the taxpayer (in case of a
departmental appeal) should
be considered. Historically, per
the data available in the public
domain, the appeals decided
against the department (in
case of departmental appeals)
average (over a four-year period
between 2011-12 and 2014-15)
about 53 percent before the
ITAT, about 61 percent before
High Courts, and about 51
percent before the Supreme
Court. Figure 5 features a chart
regarding this analysis.
Direct Tax Dispute Resolution Scheme, 2016
S.O. 4222(E).- In exercise of the powers conferred by section 202 of the Finance Act,
2016 (28 of 2016), the Central Government hereby amends the notification of the
Ministry of Finance (Department of Revenue), number S.O.1902(E) dated the 26th
May, 2016, published in the Gazette of India, Extraordinary, Part-II, Section-3, Subsection (ii) dated the 26th May, 2016, namely:-
2. In the said notification, for the figures, letters and words “31st day of December,
2016”, the figures, letters and words “31st day of January, 2017” shall be substituted.
Reducing pending tax
litigation
A number of initiatives have
been taken to reduce pending
tax litigation (as listed in
Section G and Annexure 2).
The additional measure taken
by the government in the
Budget 2020 is the proposal for
a legacy tax dispute resolution
scheme for which a legislation
has been introduced in the
parliament as detailed earlier.
The inspiration for this comes
from the dispute resolution
scheme used in case of the
legacy indirect tax disputes
-the Sabka Vishwas Scheme
(Legacy Dispute Resolution)
2019 (SVLRDS-2019), which
was in place from September
2019 to 15 January 2020
(see Annexure 3 for scheme
details). Per the latest reports,
it has led to closing of about
189,000 tax disputes. The
SLRDS-2019 envisaged
graded relief to the extent of
70 percent of disputed tax
demands
A comparison of India’s
administrative procedure to
manage income tax disputes with
those of four other countries Australia, the United States, the
United Kingdom, and
Canada (a
brief outline of the administrative
procedures in these countries
is at, reveals a
significant difference.
It is only in India that the tax
administration files an appeal
against an appeal decision in
favor of the taxpayer (on a
taxpayer appeal) by the CIT(A),
who is an officer of the tax
administration. This means that
both the taxpayer and the tax
administration (assessment wing)
can appeal to the tax tribunal
(i.e., the ITAT) against the decision
of the appeals wing [CIT(A)] of the
tax administration. In all other
tax administrations, the order
issued by the tax administration
on a taxpayer appeal is taken as
final and only the taxpayer can
file an appeal to the Tax Tribunal
if he is not satisfied with the
order.
Direct Tax Dispute Resolution Scheme- 2016 Extended up to 31st Jan, 2017
In order to reduce the pending litigation, the Direct Tax Dispute Resolution
Scheme, 2016 (the Scheme) was introduced by the Finance Act, 2016. The
Scheme came into force from 1st June, 2016 vide notification S.O. 1902(E) dated
26th May, 2016. The scheme was to close on 31st December, 2016.
However, in view of the representations received from various stakeholders
and for the convenience of the taxpayers, the last date for availing the Scheme
has been extended up to 31st January, 2017 vide S.O. 4222(E) dated 29th
December, 2016.
The full text of the notification is available on the departmental website
www.incometaxindia.gov.in.
Created & Posted by Suraj Kumar
Accountant at TAXAJ
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